In the previous article, we tried to understand History of Forex Market – Bretton Woods Agreement. Now, in this article, we’ll understand History of Forex market – Jamaican Currency System.
History of the Forex Market
The self-destruction of the Bretton Woods system grew like a snow coma.
Already on December 17, 1971, the dollar depreciated against gold by 7.89% and the official price of gold increased from 35 to 38 dollars per 1 troy ounce without renewing the exchange of dollars for gold at this rate. A little more than a year (February 13, 1973), the dollar devalued to 42.2 dollars per 1 troy ounce.
In 1973, the link to the dollar was abolished by Japan and the European Union. Unofficially from this point on, the fixed exchange rate regime ended its existence, as it was not supported by the most influential countries, and a currency system of “floating rates with central bank intervention” (dirty float) appeared.
At the same time, the IMF’s “Committee of Twenty” prepared in 1972-1974. project to reform the world monetary system.
In January 1976, in Kingston (Jamaica), the IMF member countries signed a new agreement, and in 1978 the relevant changes were made in the IMF statute:
- The official price of gold is cancelled, the exchange of dollars for gold is stopped, no national currency has any more gold content. The gold market from the main money market turned into a kind of commodity market.
- countries are given the right to choose any exchange rate regime: freely floating, limited (corridor to one currency and free navigation to others) or fixed (tied to one currency, SDR, basket or sliding parity).
- introduced a new type of international means of payment – SDR ( special drawing rights – special drawing rights) – the unit of account of the International Monetary Fund, used for non-cash international payments through entries in special accounts. Each country received its share of the SDR in accordance with its share in the IMF.
- the possibilities of conducting an independent domestic monetary policy by individual central banks have been expanded. Central banks of countries are not obliged to intervene in the work of foreign exchange markets to maintain a fixed parity of their currency. However, they carry out currency interventions to stabilize exchange rates.
- The Jamaican currency system was supposed to become more flexible than the Bretton Woods, and quickly adapt to the volatility of balance of payments and exchange rates. However, despite the approval of floating exchange rates, the dollar formally deprived of the status of the main means of payment has actually remained in this role, which is due to the more powerful economic, scientific, technical and military potential of the United States in comparison with other countries.
In addition, the chronic weakness of the dollar, characteristic of the 1970s, was replaced by a sharp increase in its rate by almost 2/3 from August 1980 to March 1985 under the influence of a number of factors.
The introduction of floating instead of fixed exchange rates in most countries (since March 1973) did not ensure their stability, despite the huge costs of foreign exchange intervention. This regime proved incapable of ensuring a rapid equalization of balance of payments and inflation in various countries, an end to sudden movements of capital, currency speculation, etc.
A number of countries continued to tie national currencies to other currencies: the dollar, pound , etc., some tied their rates to “currency baskets”, or SDRs.
On March 13, 1979, the European monetary system was created by the members of the European Community for the purpose of economic integration, stability with their own currency, and protection from the expansion of the dollar.
The European Monetary System was based on the ECU – the European Currency Unit (ECU). The ECU’s contingent value was determined using the currency basket method, which includes the currencies of all 12 EU countries. The share of currencies in the ECU basket depended on the share of countries in the total GNP of the EU member states, their mutual trade turnover and participation in short-term support credits (in September 1993, in accordance with the Maastricht Treaty, the “absolute weight” of currencies in the ECU was frozen) course. The ECU emission was partially secured by gold.
The exchange rate regime was based on the joint floating of currencies within the established limits of mutual fluctuations (+/- 2.25% of the central rate). On the basis of the central courses in the ECU, mutual courses in the form of a matrix with established intervention points are calculated within the permissible fluctuations of exchange rates +/- 2.25%. When the achievement of 3/4 limits of course fluctuations in the ECU was recorded, preventive regulatory measures were taken.
Over time, the ECU was used not only in interstate, but also in private calculations (the currency of Eurobond loans, syndicated loans, bank deposits and loans, traveler’s checks). In 1990, the United Kingdom joined the mechanism of exchange rates, and in 1992 after a significant drop in pounds sterling caused by speculative sales, Britain withdrew from the European monetary system. After the withdrawal from the sterling agreement in 1993 due to the strong devaluation of other European currencies, the fluctuation limit was increased to 15%.
In 1999, the Euro was introduced (instead of the ECU). The agreement involved 12 countries that meet certain parameters for inflation and the state budget deficit.
January 1, 2002 The euro was introduced into cash circulation.
By 2007, the euro had already reached 1.4 US dollars and became no less popular both in international settlements and as a reserve currency in the Central Banks.